This paper provides a direct test of banks' ability to mitigate informational
asymmetries. In syndicated loans, lenders' incentive to screen ex ante and monitor ex
post borrowers increases with the share they retain; consequently, the higher this
share, the less risky the loan is considered by investors, and the lower is the interest
rate they require. We analyze a large sample of syndicated loans arranged in over 80
countries during the nineties. We find that interest rates decrease in the share of the
facility retained by the arranger. This certification effect is greater for smaller, more
opaque loans where screening and monitoring are more valuable....more